Goods and Services Tax (GST) is an indirect tax applicable throughout India which has replaced multiple cascading taxes levied by Central and State governments. GST was introduced as The Constitution (One hundred and first Amendment) Act 2017 following the Constitution 122nd Amendment Bill. The GST is governed by a GST Council and its Chairman is the Finance Minister of India. The process of forming the legislation took 17 years. It was first proposed in the year 2000. The minimum tax rate under GST is 0% and highest tax rate is 28%.
Key Facts
- Under GST, Goods and services are taxed at the following rates: 0%, 5%, 12%, 18%, 28%.
- There is a special rate of 0.25% on rough precious and semi-precious stones and 3% on gold. In addition a cess of 15% or other rates on top of 28% GST applies on few items like aerated drinks, luxury cars and tobacco products.
- A single GST has replaced several existing taxes and levies which include: central excise duty, services tax, additional customs duty, surcharges, state-level value added tax and Octroi.
- Other levies which were applicable on inter-state transportation of goods have also been done away with the launch of GST regime.
Activities covered under GST
GST is levied on all transactions such as sale, transfer, purchase, barter, lease, or import of goods and/or services. India has adopted a dual GST model implying that taxation is administered by both the Union and State Governments.
Transactions made within a single state will be levied with Central GST (CGST) by the Central Government and State GST (SGST) by the government of that state. For inter-state transactions and imported goods or services, an Integrated GST (IGST) is levied by the Central Government.
GST is a consumption-based tax the impact of which will be at the destination. The taxes therefore, are paid to the state where the goods or services are consumed and not the state in which they were produced.
IGST complicates tax collection for State Governments by disabling them to collect the tax owed to them directly from the Central Government. Under the previous system, a state would have to only deal with a single government in order to collect tax revenue.
GST: Why Differential tax rates are applied?
- Lower rates for essential items and the highest for luxury and de-merits goods.
- Service Tax has gone up from 15% to 18%. The services are taxed at lower rates such as train tickets and will fall in the lower slabs.
- Essential items including food is taxed at zero rate. The propose is to control inflation as food and essential items constitute roughly half of the consumer inflation basket.
- The lowest rate of 5% is for common use items. There are two standard rates of 12 per cent and 18 per cent, which fall on the bulk of the goods and services. This includes fast-moving consumer goods.
- Highest tax slab is applicable to items which are currently taxed at 30-31% – excise duty plus VAT.
- Ultra luxuries, demerit and sin goods like tobacco and aerated drinks attract a cess for a period of five years on top of the 28 per cent GST. The collection from this cess as well as that of the clean energy cess would create a revenue pool which would be used for compensating states for any loss of revenue during the first 5 years of implementation of GST. The cess would be lapsable after 5 years.
- The structure is a compromise to accommodate demand for highest tax rate of 40% by states like Kerala.
- The principle for determining the rate on each item is to levy and collect the GST at the rate slab closest to the current tax incidence on it.
GST Calculation
Assume that the GST is set at 20%. Suppose that the manufacturing cost of a Product A is 100 and assuming a GST of 20% the total amount is Rs. 120. The next step of taxation would be when the Product is sold to consumers. Suppose the product is sold at a price of 150. The GST will charge another 20% on just the difference of Rs. 150 and Rs. 120 i.e. only 20% on Rs. 30 which is equal to Rs. 6. Accordingly, the final price is Rs. 150 + Rs. 6. GST will be applied at every step of value creation. The GST is estimated to provide an immediate boost of 0.9% – 1.4% of the GDP.
GST is in a form of comprehensive indirect tax on manufacturing, sales and consumption of goods and services within the country. It is based on the input tax method. The tax is levied and collected at each stage of sale or purchase of goods or services.
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